December 22, 2009

Scenario Planning: A prudent activity for any organization

An organizational strategist has many tools and activities to help achieve organizational success. An organization’s strategy is absolutely pivotal to staying afloat in the market space. With all of the complexities involved in a market, the changing factors and variables, and evolving customer needs and wants, it is difficult for an organization to continue to navigate without charting a new course frequently. Scenario planning is an activity that helps an organization chart a course and sail forward. Scenarios are a way to think out the “What if…” possibilities that could happen. They help with organizational thinking, brainstorming, planning, and decision making.

Recently, I read a McKinsey Quarterly article entitled “The use and abuse of scenario planning.” This article had a lot to say and many good points. I’ve included some excerpts below.

-Selected Excerpts from McKinsey Quarterly-

Scenarios expand your thinking

You will think more broadly if you develop a range of possible outcomes, each backed by the sequence of events that would lead to them. The exercise is particularly valuable because of a human quirk that leads us to expect that the future will resemble the past and that change will occur only gradually. By demonstrating how – and why – things could quite possibly become much better or worse, we increase our readiness for the range of possibilities the future may hold. You are obliged to ask yourself why the past might not be a helpful guide, and you may find some surprisingly compelling answers.

Scenarios uncover inevitable or near-inevitable futures

A sufficiently broad scenario-building effort yields another valuable result. As the analysis underlying each scenario proceeds, you often identify some particularly powerful drivers of change. These drivers result in outcomes that are the inevitable consequence of events that have already happened, or of trends that are already well developed. Shell, the pioneer in scenario planning, described these as “predetermined outcomes” and captured the essence of this idea with the saying, “It has rained in the mountains, so it will flood in the plains.” In developing scenarios, companies should search for predetermined outcomes- particularly unexpected ones, which are often the most powerful source of new insight uncovered in the scenario-development process.

Broadly speaking, there are four kinds of predetermined outcomes: demographic trends, economic action and reaction, the reversal of unsustainable trends, and scheduled events (which may be beyond the typical planning horizon).

Scenarios protect against ‘groupthink’

Often, the power structure in companies inhibits the free flow of debate. People in meetings typically agree with whatever the most senior person in the room says. In particularly hierarchical companies, employees will wait for the most senior executive to state an opinion before venturing their own-which then magically mirrors that of the senior person. Scenarios allow companies to break out of this trap by providing a political “safe haven” for contrarian thinking.

-Considering Scenarios-

Imagining and working through scenarios can save precious time, which allows for quicker organizational choices and actions. The most helpful scenarios to think through would be the most likely ones. Having a series of likely scenarios planned out would be a helpful arsenal for an organization. However, be sure to include some long term scenarios as well as the less likely scenarios which could have significant business impact (good or bad). Additionally, it’s important to update scenarios to maintain their value over time. As the business environment changes, so too should the scenarios you utilize. As the article states “to retain some relevance, a scenario must be a living thing… Scenarios get better if revised over time. It is useful to add one scenario for each that is discarded.”

Here are some scenarios that might be helpful to work through:

What if the key materials your organization uses become scare and/or very expensive (for example – water shortages are predicted in the future), how would you adjust?

What if real estate prices suddenly changes (this could be really expensive or really cheap – what would your organization do?), what might you sell? What might you buy?

What if customer’s standard of living changes (meaning an economic challenges occurs, like our current recession), what would need to happen?

What if formerly major product or service suddenly became unavailable, what would you do?

What if a major competitor was temporarily paralyzed (litigation, shortage or some other disruption made it’s product/service unavailable to customers), how would you capture the surge of business?

-Closing-

Scenario planning is meant to be an exercise which helps an organization stay nimble, prepared, and able to improvise. By no means do scenarios exactly predict what actually happens in the market. If so, that’s a remarkably well prepared scenario plan. Scenarios are another tool in the strategist’s arsenal that helps inform decision making.